130% of FTSE Guaranteed !?!?

Discussion in 'Educational Resources' started by moonpi, Sep 29, 2005.

  1. moonpi


    I just wanted to see if anyone here had seen this offer from Virgin


    Offering a 5 year "bond" where the interest paid will equal 130% of whatever the FTSE 100 returns are for that period, while guaranteeing that your money wont fall below 100% of what you invested.... you know the saying about things that sound to good to be true..... Im sure there must be some catch, but I can't find any.

    Is it possible Virgin is in trouble and thier cost of capital is that high? and if so is there any sort of likelyhood that they will go bankrupt?
  2. European banks have been offering similar deals for several years now. Nothing new.
  3. moonpi


    Didn't know that, thanks. Know where I could learn more about these types of arrangements?
  4. The difficulty with non-english europe is most of us, myself included, don't read their material.

    But 2-3 years ago some banks were pushing these arrangements locally in France, Spain, Portugal. Can't remember which banks though. Some mutual funds there had similar offerings too.

    If I remember correctly they were offering 100% upside market participation, no downside risk with some lock-in period and guaranteed x.x% interest.

    Try the following...



  5. More info regarding the risks.

    As ever though, there are cons to set against all those pros. You can't get at your money during the five years and the maturity value is only based on the average level of the Footsie during the final 12 months of the five-year term. And if the stock market stagnates and you end up only getting your capital back, inflation will have nibbled away at its value.

    You also don't get any dividends because you're not the one investing in the stock market - the bond issuer gets them. If you were investing directly in the stock market, you'd be likely to get 15% to 20% of your original sum in dividends over a period of 5 years. Finally, you also have to pay income tax on any profits you make. With a direct stock market investment, you either pay capital gains tax if your profit exceed the annual limit (currently £8,500) or you can shelter your investment in an ISA.
  6. moonpi


    I didn't think about the dividend issue. That doesn't make the deal look as bad for the bank as I had previously thought. Thanks again for the info guys!
  7. AK100


    Well, with these bonds you have to look at whose on either side of the trade.

    The buyers are generally unsophisticated private investors who generally know nothing about structured products.

    On the other hand you're got the banks and their experts who've designed said products.

    So who do you think is going to get the better deal?

    And why do you think they're being promoted so heavily?

    Also ask yourself why many IFAs (Independent Financial Advisors) are refusing to sell them to their clients.

    Summary, they're not bad deals for investors but anyone who knows that they're talking about can get better returns elsewhere. Of course if the market falls 50% over the next 5 years then these products will have been the horse to back, but that's using hindsight.